Beware rising complacency in the face of shocks – and how markets are ignoring real liquidity.
Blain’s Morning Porridge 8th Jan 2025 – Beware rising complacency in the face of shocks – and how markets are ignoring real liquidity.
“I am no stranger to people who don’t know what they are talking about trying to silence women like me.”
The first week of the New Year has provided multiple shocks and hints of a wild ride ahead the next 4 years. The risk is we become complacent and miss real damage being done! Meanwhile, the rise of Private Capital Markets is impacting the real liquidity of global markets – when push inevitably comes to shove, that could be a problem!
Apologies for the absence of Morning Porridge y’day. My wife has been fighting off the New Year flu, and in the holiday-season spirit shared it with me! A large dose of Night Nurse on Monday meant I simply didn’t wake up yesterday… until I groggily emerged to the headlines from the US afternoon session. Wow. This morning? I’m trying the Double Expresso vs Thumping Headache gambit. (Note: give Night Nurse a try – wow, it gives you weird multi-coloured hallucinogenic dreams…!)
Back on Planet Trump…. I wonder if the world will ever be the same again? I have a loosely connected two-part Porridge for you this morning; i) getting over the shock of the Trusk Brothers, and ii) the future of financial markets – and how to play them.
Part 1: Politics for Dummies – 2025 edition
The first few days of the 2025 market have crystallised some dramatic new truths for market participants. What we are watching from the USA demonstrates the world has changed. Take nothing for granted – not even your Atlas as The Gulf of Mexico becomes Freedom Fries Bay. Panama, Interest Rates, Greenland. You name it. These guys want to shock you. I have to wonder what is going on in Italy; Giorgia Meloni is under Musk’s spell, hoping to become a favoured nation by signing up to Starlink rather than wait for Europe’s own €11bln satellite-based coms system, Iris. Divide and rule.
Yesterday, stocks and bonds were trading in lockstep as the market tried to catch up and figure the consequences of the latest from Trump and Musk. The bottom line is Musk and Trump’s political destabilisation will continue to rile, confuse, confound and rumble markets – in the hope we will get used to it. Some traders believe much of it is noise and “negotiation tactics” – not sure I see a military threat to a fellow member of Nato in that light. Bottom line is these are uncertain times for markets. It means learning how new vectors for the political volatility function.
At the back of my mind is the reality of how quickly markets adapt and accept new realities – maybe in a few weeks we’ll just stop reacting to whatever the gruesome twosome come out with. That’s the real risk – that we become so used to hearing Trump or Musk say something outrageous, we miss just how significantly they completely FUBAR the basis of Western hegemony and economic strength. Just saying. Stay awake.
The reality is we cope with uncertainty, doubt and noise better than we think – but complacency is a very dangerous counter force to our instinct for capital preservation.
Meanwhile, although the pages of the right-wing UK papers are full of support for “brave” right-wingers calling out the government, (barf!), I suspect most Brits are deeply concerned at Musk’s comments and interventions on the UK.
Full respect to UK safeguarding minister Jess Phillips for her calmness in the face of being called a rape genocide apologist and witch by Musk as he tweeted she should be in jail. She is now receiving extra security. She may not be everyone’s cup of tea, but she has a long and distinguished record in local and national politics behind her.
In contrast I have absolutely zero time for former Tory Minister and now shadow justice secretary Robert Jenrick demanding a new inquiry into grooming gangs. He illustrates rancid political opportunism, trying to curry favour with Musk (“please, please make me leader of Reform” (rumour is he nearly joined Reform last month, but was only just persuaded to stay in the Conservatives on the basis Kemi Badenough won’t last a year.)) Last night the BBC demonstrated he had not raised the issue of child abuse once while a member of the last 14-year Tory led government. He was gutted live on air by the BBC’s Nick Robinson – it was classic. The eight circle of hell awaits him – it is reserved for those who intentionally mislead others for their own gain. It’s going to become a very crowded place in coming years.
If I was a conspiracy theorist – and I stress I am not – I’d be writing a book about how a coterie of James Bond Tech-Lord Villains and a ruthless politician plan the takeover of the western world, using stealth, AI, Bitcoin, the destruction of conventional wealth, and destabilisation of political structures, to create a new autocratic state of overlords and slaves… but that would never sell… would it?
Part 2 : Liquidity is the risk for new markets
Getting past the noise about Trump and Musk, there is also fundamental change in financial markets.. and its something I’ve been part of – the irresistible rise of Private Capital Markets. In a very short time, since the Global Finance Crisis that began in 2007 (most folk think it ended in 2008, but I reckon its ongoing), the nature of markets has fundamentally shifted.
Since the 1600s markets have thrived due to the liquidity they create. Money circulating round markets has enabled the effective allocation of capital to companies and governments by the innovation of capital markets concepts like joint stock companies, exchanges, bonds, and bond markets. That created a surge in wealth and reinvestment, leading to the sustained growth of Western Economies. What distinguishes the Western Nations has been the effectiveness of capital allocation – any company with an eye on success, or nation likely to repay its debt, could access liquidity through the structure of the markets and financial institutions around them.
The City of London, and other financial centres thrived as a result – one stop shops where the legal, accounting, banking and settlement services required to originate, allocate, trade and invest in capital instruments to generate the returns investors required could be found. It became a global market. Finance thrived on systems, transparency and rules, all of which supported liquidity within the system, which was kept flowing through the banks and brokers trading capital. Public exchanges and open markets, where brokers and investment banks made markets where transparent price discovery based on freely available information were critical to liquidity – which was the key to the system.
In just over a decade since the Global Financial Crisis of 2008, markets have fundamentally shifted – the fastest growing markets are now Private Capital Markets, where capital is directed without the invisible hand of markets. Its happened because of regulation diminishing the role of banks in lending and market making, and capital available to funds. I’ve spent the last 15 years in PCM – and have a very clear idea of how deals work. Direct lenders take decisions on rates and risk based on how they process and acquire data on borrowers. Price discovery is a nebulous concept in Private markets – prices are dictated by the information available to the lender.
That’s true across Private Capital Markets – it’s the data and ability to process that data (including the use of AI) that allows the big private capital markets firms to invest. That process no longer relies on Liquidity – the ability to buy/sell risk. The result is a market where pricing information is also private – hence the increasing desire of every fund to participate to become price setters rather than price takers.
What happens when/if it goes wrong? Private Equity buyers seek the opportunity to exit their investments through trade sales or IPOs – what happens when there is no demand for these firms because a) other investors see the effect of debt on their balance sheets, or b) trade buyers see the value ascribed to them is too high? These then become stranded assets held by private equity investors with zero interest in “mature” assets? Or what happens in Private Credit markets when bankruptcies start to rise faster than the models predict, and the dearth of public transparent liquidity becomes apparent. Trying to sell secondary private capital positions (one of the things I do in Windshift Capital) is notoriously difficult.
Almost everything I read over the holidays on the subject of market liquidity was rosy and positive. What if it’s not…. ?
Just asking…
Out of time and back to the day job..
Bill Blain
Author of The Morning Porridge